Small caps, big change: European leadership in an age of uncertainty

In the intricate landscape of European geopolitics, leadership has become a profoundly challenging endeavour. We were invited to discuss this theme at a recent Janus Henderson-hosted event, featuring a fascinating keynote from a leading UK politician with first-hand insight into how things unfolded in the wake of the UK referendum on EU membership. This was a particularly complex period for the UK, both domestically and in terms of foreign policy, as the nation struggled to chart its way through a polarised clash in political ideologies around sovereignty, identity and the country’s future relationship with the world.

These kinds of insights are invaluable for helping to frame our views on strategy and positioning. Central to understanding modern leadership challenges are the significant structural shifts that are fundamentally altering the decision-making landscape at a political and corporate level.

This was a great opportunity to explore an important and topical issue for investors, with input from a senior political figure involved in high-level decision at a seminal time for the UK. As traditional frameworks falter, investors are reliant on leaders exhibiting strategic conviction and adaptability to help provide the solid foundation for economies and businesses to prosper.

Following the event, it was useful to reflect on some of the topics discussed, addressing an historic shift in rhetoric, political behaviour and policy across Europe, in the wider context of broader geopolitical changes. Plus, of course, some thoughts on what we might expect, with regards to ramifications for smaller companies in the region, and how this necessitates the development of new capabilities.

Polarisation, populism and the cult of celebrity

The rise of political polarisation has created a world of binary absolutes, eroding the necessary middle ground that provides space for nuanced policy-making and measured responses. This political tribalism has complicated the task of governance, with any change in policy or misstep platformed as failure, leapt on and magnified by both social media and political opponents.

Populism has also taken root in the western world, with voters increasingly favouring simplistic solutions over complex policy frameworks. Politicians who were formerly well versed in dealing with traditional media forms have struggled to engage with an audience that desires clarity and immediate gratification. This has led to a preference for simplified narratives, and short (often empty) soundbites, leaving conventional political figures at a disadvantage.

These issues have gone hand in hand with a resurgence in ‘cult of personality’ politics. In the era of Trump 2.0, personal relationships between leaders have become crucial in determining market access and business outcomes. Bilateral meetings now function as platform opportunities and as a reflection of policy expertise, rather than traditional protocol-driven diplomacy. The consequences for politicians been seen as ‘losing’ on this performative stage has fundamentally changed leadership requirements at both a state and corporate level.

These shifts are fundamentally altering the operating environment for political leaders, executives and investors by fostering conditions where traditional ‘certainties’ are failing and new capabilities become essential.

Modern leadership requires more than just good management

So how can leaders navigate what is an increasingly complex environment? Globally, we are seeing multilateralism experience evolution, rather than disappearing, with consequences for business, supply chains and trade relationships. While United Nations (UN) influence is declining, developing partnerships like BRICS (Brazil, Russia, India, China and South Africa) and AUKUS (a security framework between Australia, the UK and US) are reshaping geopolitical dynamics. This shift is complicating both politics and investment strategies, adding caution to strategic decisions on spending, allocation and positioning.

As traditional institutional frameworks lose their grip, those businesses that can pivot their focus, or move swiftly to fill these voids, are best positioned to take advantage. This phenomenon is most visible among tech leaders, but it also favours more agile or nimble businesses, many of whom operate in the smaller cap space. Understanding what companies are positioned to benefit from this institutional weakening is vital to identifying both risks and investment opportunities.

Leadership is fundamental to success for smaller companies

Leadership matters at every level, but it is particularly consequential to the outcome for smaller companies. Those visionaries who can spot opportunities and move nimbly, whilst also managing the cultural challenge of taking people with them, can command their context better than larger corporations. Agility and nimbleness matter disproportionately, creating asymmetric advantages for small caps. Small caps rise up through disruption and opportunity, and that depends on good leadership.

The US has been a dominant force in equities for much of the past decade, and this has been reflected in relative performance. But Europe is getting its act together, correlating with a lot of money flowing into innovation. We are seeing a lot of attention being paid to reducing regulatory obstacles and complexity, a push that has been absent in Europe since the global financial crisis. Governments and corporations are seeking to improve resilience – and smaller companies with the right capabilities are well positioned to partner this process, or potentially become targets for bolt-on acquisitions. This means that from an innovation and opportunity perspective, smaller caps are well positioned. The scale of planned investment in infrastructure and defence spending in Europe represents opportunities across industries, most visibly within aerospace, dual-use technology and cyber security, which we expect to favour smaller businesses overall.